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From today's Wall Street Journal Europe

Updated April 10, 2008 12:01 a.m. ET

A trans-Atlantic spat over online gambling may help rewrite the rules of the game for Internet commerce across borders. For a change, the Europeans stand on the side of free trade, while America dabbles in regulatory overreach.

The European Union last month launched an internal probe into whether the U.S. Justice Department selectively enforces its antigambling laws against European online firms that offer wagers on sports events. Brussels is making a narrow legal point that Washington discriminates against Europeans by simultaneously permitting U.S. Internet horse betting. That's against World Trade Organization rules, and the case may end up there.

The U.S. last year lost a similar WTO online gambling case against Antigua and Barbuda. The island nation argued that U.S. online gambling rules violated Washington's GATT commitments to open its market in "recreational, cultural and sporting services." The U.S. countered that its policies were justified to protect public morals and public order, a legitimate exception under WTO rules. But the WTO panel ruled that America wasn't applying its restrictions equally to foreigners and domestic operators. U.S. online horse-betting sites aren't banned.

Washington could have stood down then. Instead, it is "threatening and pressing criminal prosecutions, forfeitures and other enforcement actions against foreign online gaming operators," according to the London-based Remote Gambling Association, which took the complaint to the EU. In doing so, Washington is also practicing a form of universal jurisdiction by applying domestic law to foreigners beyond its borders &ndash; a legal interpretation that the U.S. has, rightly, condemned in other cases.

In 2006, the former chairman of U.K.-based gambling firm Sportingbet, Peter Dicks, was detained in New York. The Briton was wanted in Louisiana on online gambling charges. Then-New York Governor George Pataki declined to sign a warrant extraditing him, and he was released. Many European industry executives now no longer stop over in the U.S., let alone visit the country, for fear of arrest. "There is a list of wanted people but nobody knows who's on it," said Clive Hawswood of the Remote Gambling Association.

Justice has continued to threaten these companies even though the alleged transgressions are all in the past, the association's complaint says. The sites stopped offering their services to U.S. customers after the U.S. tightened its antigambling laws in 2006. The Unlawful Internet Gambling Enforcement Act requires financial institutions to identify and block gambling-related payments.

As it happens, the U.S. ban on online betting is also impractical. At a Congressional hearing last week, the American Bankers Association explained how difficult it is to identify customers engaged in illegal Internet games. The association's Wayne Abernathy said the law makes banks "police, prosecutors, judges and executing marshals in place of real enforcement officers."

We have our differences with House Financial Services Chairman Barney Frank, but he may have been on to something when he introduced a bill to exempt licensed operators from the ban. Gambling is a vice, and social problems attach themselves to it. By legalizing and regulating the business, however, Washington could more effectively battle such problems as underage gambling and addiction. It would also avoid unnecessary trade tiffs with its leading commercial partners. And it would exempt cyberspace from overaggressive regulators, in America or anywhere else.

See all of today's editorials and op-eds, plus video commentary, onOpinion Journal.